The Law and Practice in Bankruptcy Under the National Bankruptcy Act of 1898

plies with the requirements of the recording acts,76 and in case of a failure, as where the instrument was not properly acknowledged, the trustee may avail himself of the defects, in the same manner and to the same effect as a lien or judgment creditor."

(7) PROPERTY AFFECTED. The trustee has no right as to property in the possession of the bankrupt which did not belong to him," nor is the general rule that the trustee takes the property subject to such liens as may be enforced against it, affected by the amendment.80

(8) PRIORITY OF DEBTS.- The amendment does not conflict with section 64-b (5) relating to priority of debts.81 It has been held that

parties. Matter of Social Circle Cotton Mills (D. C., Ga.), 32 Am. B. R. 567, 213 Fed. 994.

Under the Bankruptcy Act and the Code of Iowa, a mortgage unrecorded, whether written or oral, is of no validity as against the rights of the trustee in bankruptcy of the mortgagor. Matter of Cooper (D. C., Ia.), 35 Am. B. R. 321, 216 Fed. 309.

A statute making a mortgage invalid as against the rights of any third party unless acknowledged and recorded has been held not applicable as against a trustee in bankruptcy of the mortgagor. Lewin v. Telluride Iron Works Co. (C. C. A., 8th Cir.), 47 Am. B. R. 22, 272 Fed. 590.

76. Groner v. Babcock Mfg. Co., 45 Am. B. R. 563, 267 Fed. 822.

77. Matter of Caslon Press (C. C. A., 7th Cir.), 36 Am. B. R. 127, 129, 229 Fed. 133; Matter of Empress Pharmacy (D. C., Iowa), 38 Am. B. R. 145, in which case there was a failure to index properly a mortgage executed by the bankrupt. Matter of Rosenthal (D. C., Ga.), 39 Am. B. R. 30, 238 Fed. 597.

78. Cross-reference.- See more in detail under section 70, post.

79. Property subject to valid liens. -A creditor holding an unsatisfied execution cannot attach the property of a third person accidentally in the possession of a bankrupt, hence, the trustee in bankruptcy is not given a superior lien by this section, as amended

in 1910, upon money paid to the bank. rupt by mistake and upon which a bank had a lien. Brown Bros. Co. v. Smith Bros. Co. (D. C., La.), 37 Am.' B. R. 30, 231 Fed. 475.

In respect to real property which is in the possession of a person other than the bankrupt under an oral purchase thereof, the trustee holds no better title than the bankrupt, and is not entitled to the property, since under the amendment he has merely the rights of " a creditor holding an execution." In re Snelling (D. C., Mass.), 29 Am. B. R. 818, 202 Fed. 259, affd. Clark & Snelling, 30 Am. B. R. 50, 205 Fed. 240.

80. See discussion under § 70, post; Gates Co. v. Stevens Construction Co. (N. Y. Ct. of App.), 38 Am. B. R. 396, 220 N. Y. 38, 115 N. E. 22; Matter of Creech Bros. Lumber Co. (C. C. A., 9th Cir.), 39 Am. B. R. 487, 240 Fed. 8.

81. Construction with section 64-b (5). - In re Calhoun Supply Co. (C. C. A., Ala.), 26 Am. B. R. 528, 189 Fed. 537, and In re Bazemore (D. C., Ala.), 26 Am. B. R. 494, 189 Fed. 236, the court said: "The construction, necessary to effectuate the intention of Congress, does not seem to me to make the amended section conflict with section 64-b, clause 5. Under the State law the conditional vendor has no priority over judgment creditors without notice, and the amendment to the Bankruptcy Act places the trustee in that category. As against his right as conferred by

a trustee may object to the priority of a claim based upon a mortgage given as security and recorded within the four months' period, and the referee may determine the question of preference in a proper

(9) CONDITIONAL SALE CONTRACTS.- The title of a trustee in bankruptcy to property of the bankrupt purchased under a conditional sale contract is considered under § 70, post. Questions regarding the failure to file or record conditional sales contracts are discussed under § 67, post.

(10) CHATTEL MORTGAGES.- The trustee of a bankrupt chattel mortgagor has all the rights and remedies of a lien or judgment creditor as against an unrecorded chattel mortgage, and the mortgagee may not after the filing of a petition in bankruptcy against the 'mortgagor take possession of the property under the mortgage.83 The section as amended covers the rights of creditors under a chattel mortgage which is void as to such creditors under the laws of the State where made, and the trustee may enforce such rights as against the mortgagee to the same extent as the creditors might have done.8*

the amended section of the Act, the conditional vendor has no priority and the order of payment provided for by section 64 is not therefore interfered with by not allowing the conditional vendor priority of payment." But in In re Lausman (D. C., Ky.), 25 Am. B. R. 186, 183 Fed. 647, it has been held that the questions involved do not depend upon what sort of title the trustee may take to the property coming into his custody as provided by the amendment of 1910 to section 47-a (2) of the Bankruptcy Act, but upon how that property is required to be distributed under section 64-b (5) thereof.

82. In re Lorch & Co. (D. C., Ky.), 28 Am. B. R. 784, 199 Fed. 944; Matter of McCormick (D. C., Fla.), 47 Am. B. R. 235, 279 Fed. 916.

83. Fairbanks Steam Shovel Co. v. Wills, 240 U. S. 642, 36 Am. B. R. 754, 60 L. Ed. 841, affg. 32 Am. B. R. 381, 212 Fed. 688; Matter of Sullivan Co., Inc. (D. C., N. Y.), 41 Am. B. R. 189, 247 Fed. 139, affd. 42 Am. B. R. 530, 254 Fed. 660; In re Nukols (D. C., Tenn.), 29 Am. B. R. 867, 201 Fed. 437.

The effect of the amendment of 1910

to section 47-a of the Bankruptcy Act is to collectively put the creditors of a bankrupt in the position of judgment or attaching creditors by representation and enables the trustee to avoid the lien of a chattel mortgage given, prior to the amendment, by the bankrupt on merchandise retained by him under circumstances which made such mortgage void as to creditors. In re Hammond (D. C., Ohio), 26 Am. B. R. 336, 188 Fed. 1020.

If a contract of sale is one of conditional sale, so that the title does not pass out of the vendor and such a contract is not required or permitted by the laws of the State to be recorded, the reservation of title is good as against the trustee; however, if it be an absolute sale, whereby the title passes accompanied by a lien given back to the seller to secure the purchase price, the contract amounts to a chattel mortgage, and if not filed, is invalid against the trustee. Deere Plow Co. v. Mowry (C. C. A., 6th Cir.), 34 Am. B. R. 384, 222 Fed. 1.

84. In re Geiver (D. C., So. Dak.), 28 Am. B. R. 413, 193 Fed. 128; Massa

On the other hand, if the statute requiring chattel mortgages to be filed does not make unfiled mortgages invalid as to creditors it does not make them invalid as to the trustee in bankruptcy of the mortgagor. 85 Questions as to whether chattel mortgages are void as preferences or fraudulent transfers will be considered later. The effect of failure to file or record a chattel mortgage is also treated under a subsequent section.88

(11) FRAUDULENT TRANSFERS.- Under the section as so amended the trustee becomes vested with all the rights of a judgment creditor as to real property transferred in fraud of creditors more than four months prior to the filing of the petition.89 In this connection this section should be construed with sections 70-a and 70-e 90 to which the reader is referred for a more detailed discussion of the question. Reference should also be had to section 67 in regard to the right of the trustee to avoid fraudulent transfers made within four months of bankruptcy.

e. Sales by trustees. The duty of trustees concerning, and the practice on, sales of assets of the estate is considered under section seventy.

f. Employment of attorneys.-This, too, is considered elsewhere." An attorney may be needed to aid the trustee in the collection of the property of the estate. It would be the trustee's duty in such a case to employ such attorney.

g. Rapidity in administration.- This is required not only by subdivision 2 of this subsection, but by other provisions found in the law and the General Orders.92

h. Accounting for interest.- Subdivision 1 seems unnecessary. The former statute permitted a temporary investment of the funds where it appeared that distribution might be delayed by litigation." The court or referee could doubtless order this now. Thus, there might be some interest earned. The frequency with which dividends

chusetts Bonding & Ins. Co. v. Kemper

(C. C. A., 6th Cir.), 34 Am. B. R. 80, 220 Fed. 847. See, also, Senft v. Lewis (C. C. A., 2d Cir.), 39 Am. B. R. 240, 239 Fed. 116.

85. Matter of Bonk (D. C., Mich.), 46 Am. B. R. 389, 268 Fed. 1012.

86. See section 60, post.

87. See section 67, post.

88. See section 67, post.

89. In re Downing (D. C., N. Y.), 27 Am. B. R. 309, 192 Fed. 683, affd. 29

Am. B. R. 228, 201 Fed. 93; Bean v. Parker (Vt. Sup. Ct.), 38 Am. B. R. 895, 96 Atl. 17; Riggs v. Price (Mo. Sup. Ct.), 43 Am. B. R. 413, 210 S. W. 420.

90. Riggs v. Price (Mo. Sup. Ct.), 43 Am. B. R. 413, 210 S. W. 420.

91. See under section 62 of this work.

92. Compare Bankr. Act, §§ 47-a (10), 57-n, 65-b.

93. R. S., § 5060.

must be paid, however, makes any accumulation of interest unlikely. The trustee should, if possible, arrange with the official depository for interest. In any event, the interest accruing on interest-bearing assets must be collected and accounted for by the trustee."

i. Deposits. Subdivision 3 of this section makes it the duty of the trustee to deposit all the money received by him in one of the designated depositories" and General Order XXIX prescribes the method of withdrawal. These provisions of the act and the General Order are mandatory in form and were designed to insure the safety of the funds, rather than an increment by way of interest while they were idle. But it seems that the consent of all the parties interested may justify a departure from the prescribed rules. However, referees in bankruptcy should take the utmost care to see that receivers and trustees comply with the law in reference to the depositing of funds, and that they deposit all funds received by them in a regularly designated depository.98 A trustee may not deposit funds of the estate in interest-bearing savings accounts instead of a general checking account, without the consent of the creditors."

III. ACCOUNTS AND REPORTS

a. In general.-Subdivisions 6, 7, 8 and 10 relate to accounts and reports which the trustee is required to keep and submit. The subdivisions seem redundant. If a trustee follows them literally, he will spend much of his time in keeping accounts and making reports. Stripped of surplusage and read in with General Order XVII, the trustee is required (1) generally, to keep regular accounts of receipts and disbursements, and, specially, (2) to prepare and file an inventory of the estate "immediately upon entering upon his duties," (3) to report the condition of the estate within the first month after his appointment, and every two months thereafter, unless excused by the referee, and (4) to make and file a final report and account at least fifteen days before the final meeting. All this in addition to the twenty-day report on exemptions.100 But, in effect, the "inventory"

94. Bankr. Act, § 65-b, as amended, seems a partial reversal of this policy of the original law.

95. Johnson v. Norris (C. C. A., 5th Cir.), 27 Am. B. R. 107, 190 Fed. 459.

96. As to designation of depositories, see section 61, post. See also Bankruptcy Rules, Vol. IV, post.

97. Huttig Mfg. Co. v. Edwards (C.

C. A., 8th Cir.), 20 Am. B. R. 349, 354, 160 Fed. 619.

98. Matter of Barnett (D. C., Ga.), 32 Am. B. R. 585, 214 Fed. 263.

99. Matter of Dayton Coal & Iron Co. (D. C., Tenn.), 38 Am. B. R. 657, 239 Fed. 737.

100. General Order XVII.

may be but a summary of the appraisers' report;101 and the bi-monthly reports required by subdivision (10) are rarely made. The purpose that the trustee shall be always under the eye of the creditors and the referee is apparent. So long as this is recognized, a trustee will, it is thought, perform his duty satisfactorily, even though he does not always have an accountant at his elbow. A trustee, who fails to obey an order to file his final account, may be committed for contempt.102 Payments to a referee of unauthorized charges rendered by the referee, without an order therefor, should not be allowed in the trustee's account;103 although if payments made to a referee without formal order may not be considered illegal or improper the court may ratify them.104

101. Bankr. Act, see 8 70-b, Form No. 13.

102. Failure to obey order to file account; contempt.- The trustee of a bankrupt, in the face of orders requiring him to file his final account, having held up the final settlement of the bankrupt's estate for more than a year, the district court on October 27, 1910, made an order requiring the trustee to file his account by November 15, 1910, or in the alternative to be committed to jail for contempt. On November 14, 1910, a petition to revise such order was allowed. It was held that, it being necessary to consider the petition as of the date it was granted, it could not be presumed that the court intended to issue a commitment for contempt before judgment of conviction should have been pronounced; that no such judgment being disclosed by the record, and the order, so far as it required the account to be filed, being proper, the petition to revise the order must be dismissed. O'Conor v. Sunseri (C. C. A., 3d Cir.), 26 Am. B. R. 1, 184 Fed. 712.

103. Matter of Borger (D. C. Sup. Ct.), 35 Am. B. R. 238, 43 Wash. L. Rep. 436.

Duty to consult records.- A trustee in bankruptcy has no right to assume that the referee has obtained an order for the allowance of certain charges to himself. It is his duty to consult the

records of the court. Matter of Borger (D. C. Sup. Ct.), 35 Am. B. R. 238, 43 Wash. L. Rep. 436.

104. Matter of Schreiber (D. C. Sup. Ct.), 35 Am. B. R. 241, 43 Wash. L. Rep. 500.

eree.

Ratification by general creditors of improper allowances by trustee to ref- Where the general creditors of a bankrupt, after being advised by a special master that payment by the trustee to the referee of certain sums allowed by the latter to himself, is improper, approve the act of the trustee, the trustee should be allowed for such payments, although they were made Iwithout an order of the referee which might have been reviewed, and also contrary to a subsequent decision of this court. Matter of Lacey & Co. (D. C. Sup. Ct.), 35 Am. B. R. 231, 43 Wash. L. Rep. 434; Matter of Smith (D. C. Sup. Ct.), 35 Am. B. R. 237, 43 Wash. L. Rep. 436.

Audit of accounts.-It is the duty of a special master to whom a trustee's account has been referred, on the resignation of the referee, to audit the same and credit him with only such items as were authorized by law. He is not justified in allowing unlawful pay. ments merely because no creditors objected to them. Matter of Borger (D. C. Sup. Ct.), 35 Am. B. R. 238, 43 Wash. L. Rep. 436.

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